Sun Beats Down on Its Growth Forecast

Updated from 4:25 p.m. EDT:

Unix systems firm Sun Microsystems (SUNW) reported softer-than-expected third-quarter sales and warned of a sharp growth slowdown for next year after the close of trading Thursday.

For the period ended March 31, Sun's sales totaled $4.1 billion, up just 2% from the year-ago period and more than $300 million below what analysts polled by Thomson Financial/First Call were looking for. Meanwhile, Sun said that excluding certain charges it earned $263 million, or 8 cents a share, down 43% from the 14 cents a share the company earned in the same period last year. Analysts expected the company to earn 7 cents a share.

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Then came the outlook. CFO Mike Lehman said the company would likely show slight sequential revenue growth in the fourth quarter, and sequential earnings-per-share growth that would be flat to slightly lower. Moreover, Lehman said Sun now expected to grow its revenue by 15% in fiscal 2002, with earnings per share growing at a slightly higher rate. At the company's analyst meeting earlier this year, in the process of trying to get analysts and investors to focus on Sun's long-term strength in a period of short-term uncertainty, Lehman had said that the company expected its sales to grow 20% to 35% "for the next two, three years."

Sun's warning was hardly unexpected. Analysts had already lowered their estimates after Sun's midquarter update in February, when the company slashed its earnings and revenue projections in half. But at that time, Sun declined to give any guidance on the fourth quarter, citing the standard lament that it lacked visibility, or the ability to divine how much customers were planning on spending on its products.

Including charges, Sun earned $136 million, or 4 cents a share -- a 73% plunge from the $509 million, or 15 cents a share, it made last year. The company's labyrinthine earnings release said charges included "realized gains/losses on Sun's venture equity portfolio, the effects of acquisition related charges, any unusual one time items, and the cumulative tax effects."

Sun was one of the brightest stars of the late bull market, rising 500% between 1999 and September of 2000, when the wheels started falling off tech. Throughout that period, Sun's Unix systems were billed as essential infrastructure for businesses trying to compete in the new, networked economy. But, as with Cisco (CSCO), Sun's stock has been brutalized in the past several months as the company has stumbled upon a sharp growth slowdown. Even after rallying sharply over the past several sessions, Sun still sits nearly 70% below its 52-week high.

The takeaway: Growing sales by 15% from a 2001 base of around $18.5 billion is no mean feat, especially in a tough environment. But Sun's new growth target makes its long-term guidance meaningless in any but the vaguest of senses. It certainly implies a dramatic, sustained rebound in demand starting sometime in the middle of fiscal 2002. When asked whether the company's new growth target put its long-term growth rate at risk, Lehman replied, "Absolutely not." Asked to elaborate on exactly what basis investors could expect Sun to re-enter the 20% to 35% growth range, Lehman responded, "You'd have to get to second half of next year, and assuming the macroeconomics issues are behind us then, that's when we can start to have that conversation with more clarity."

Still in rally mode, investors aren't waiting to have that conversation. Sun was lately changing hands at $20.96 on Instinet. This after rallying $2.13, or 11.5%, to $20.71 in regular trading. Too cheap to sell? Using Lehman's projections -- that is, assuming Sun earns 8 cents a share in its fourth quarter and grows earnings per share by 17% in 2002 -- Sun is trading somewhere north of 36 times 2002 earnings estimates.

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